Solo 401(k) vs SEP-IRA — which one actually lets you save more?

If you're self-employed with no employees — a consultant, a contractor, a one-person S-corp — you have two serious options for tax-advantaged retirement savings: a SEP-IRA or a solo 401(k) (also sold as an "individual 401(k)" or "owner-only 401(k)"). Brokerage marketing pages describe them as roughly equivalent. They are not, and the difference is usually thousands of dollars a year in contribution room.

The structural difference

A SEP-IRA only has one kind of contribution: an employer contribution, up to 25% of your compensation [VERIFY: SEP percentage], capped at the annual additions limit of $72,000 [VERIFY: 2026 415(c) limit].

A solo 401(k) has two kinds of contributions stacked on top of each other:

1. An employee deferral — up to $24,500 [VERIFY: 2026 402(g) elective deferral limit], or 100% of compensation if you earn less than that.
2. The same employer contribution a SEP allows — up to 25% of compensation, with the combined total capped at that same $72,000 [VERIFY].

That employee deferral is the whole ballgame at lower incomes. The employer percentage is proportional to what you earn; the deferral is not.

The math at different income levels

One wrinkle first: if you're an unincorporated sole proprietor, the 25% employer rate works out to an effective 20% of net self-employment earnings after the required adjustments (you deduct half your self-employment tax, and the contribution itself comes out of the base) [VERIFY: effective rate math]. If you run an S-corp, the 25% applies to your W-2 wages only — not distributions.

Here's roughly how the two plans compare for a sole proprietor at several income levels, before catch-up contributions:

Read the $100,000 row again. Same person, same income, same tax year: the SEP allows about $18,600; the solo 401(k) allows about $43,100. That's not a rounding difference — it's more than double, purely because of the employee deferral.

The two plans only converge once your income is high enough that the employer contribution alone hits the overall cap. Below that point, the solo 401(k) wins on contribution room every single time.

What the SEP simply can't do

Beyond the raw numbers, the solo 401(k) has three features a SEP-IRA lacks:

Roth contributions. Your employee deferral can go in as Roth — up to the full $24,500 [VERIFY]. SEP-IRA contributions are pre-tax employer money. (SECURE 2.0 technically created Roth SEP contributions, but provider support has been thin — check whether your custodian actually offers it [VERIFY: current Roth SEP availability].)

Catch-up contributions. If you're 50 or older, a solo 401(k) adds an $8,000 catch-up [VERIFY: 2026 age-50 catch-up], and there's an enhanced catch-up of $11,250 [VERIFY: 2026 age 60–63 catch-up] in the years you're 60 through 63. A SEP has no catch-up concept at all. Note that if your prior-year wages exceeded the Roth catch-up wage threshold of $150,000 [VERIFY: 2026 threshold], your catch-up contributions must now be Roth.

Loans. A solo 401(k) document can permit participant loans. You can't borrow from a SEP-IRA. I'd treat this as a break-glass feature, not a reason to pick a plan — but it exists.

Where the SEP-IRA still wins

I set up SEPs for people regularly, in good conscience, in a few situations:

You're past the deadline. A SEP can be established and funded all the way up to your tax filing deadline including extensions — you can open one in September for the previous tax year. A solo 401(k) must exist before you can capture that year's employee deferral; the establishment rules have loosened, but the deferral timing rules still punish procrastinators [VERIFY: current solo-401(k) establishment and deferral election deadlines].

The income is small and irregular. If a side business nets you $10,000 in a good year, the difference in contribution room is modest, and a SEP is genuinely zero-maintenance.

You want nothing to administer. Ever. A SEP has no plan document to maintain in any meaningful sense, no amendments to sign when the law changes, and no filing requirements. A solo 401(k) requires a plan document that must be restated on the IRS's schedule, and once plan assets pass $250,000 [VERIFY: 5500-EZ threshold] you must file Form 5500-EZ every year. Miss that filing and the penalties are genuinely ugly — this is the most common way I see do-it-yourself solo 401(k)s go wrong.

One more caution in the other direction: a SEP-IRA balance is a pre-tax IRA, so it breaks the backdoor Roth via the pro-rata rule. If backdoor Roth contributions are part of your strategy, that alone is a reason to prefer the solo 401(k).

If you might hire employees

Both plans change character the moment you have eligible employees. A SEP requires you to contribute the same percentage for every eligible employee that you contribute for yourself — 25% for you means 25% for them. A 401(k) with employees stops being a "solo" plan and picks up real compliance obligations, but gives you far more design control (matching formulas, vesting, eligibility). If hiring is on the horizon, plan for that transition now rather than after.

The bottom line

Default to the solo 401(k). The employee deferral gives it more room at almost every income level, it's the only one of the two with real Roth and catch-up options, and it protects the backdoor Roth. Choose the SEP when you need last-minute setup for a prior year, when the dollars are small, or when you know yourself well enough to know the 5500-EZ will never get filed.

And wherever you open the solo 401(k), read the plan document before assuming it supports what you want — off-the-shelf documents vary a lot, which is a subject I cover in the mega backdoor Roth article.